Guns & Ammo

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Guns & Ammo: The Numbers Behind the Controversy

by Joshua Enomoto, Founder of ContangoDown.com and FutureMoneyTrends.com contributor

Despite reeling from one of the worst and most depraved mass-shootings in recent American history, shares of gun manufacturers have been one of the bright spots of 2013. For example, Sturm Ruger & Co, a stock we will later review, is up nearly 13% year-to-date as of this writing. Its cousin-in-arms, Smith & Wesson Holding Corp, has done even better, with a year-to-date performance of well over 30%! This has been an extremely difficult trend to predict, as most readers would have logically speculated that retail gun sales would have soared following a mass-shooting, yet would those sales be sustainable in light of potential legislation that would severely curtail the product line of manufacturers, in particular the oft-maligned AR-15 “assault” rifle? Discussion on firearms, whether for sporting use or investment purposes, will always generate controversy, regardless of the merits of each argument proposed. However, as with the analysis of any investment vehicle, the factual numbers are not subject to debate, and it is through the numbers by which we should approach this heavy subject.

The first statistic we will review is the number of homicides committed by weapons type (all related information provided by the Bureau of Justice):

This chart is fairly self-explanatory: out of all the homicides committed where a weapon was used, the vast majority involved handguns, yet the usage of this weapon-class peaked in 1993 and has been on an aggressive downtrend since then. Many 2nd Amendment advocates will often cite this trend as evidence that assault-rifles wrongfully take an unfair share of the blame regarding gun violence and the numbers do support such a claim…for now.

A potential wildcard to this debate is the following chart, which compares handgun homicide rates to “other” guns:

While the number of handgun-related homicides has clearly declined, the ratio of “other” guns to handguns has steadily increased. In fact, the percentage gain of nominal rates of other-gun homicides increased by 45% between 1998 and 2008. To be fair, the Bureau of Justice does not provide information beyond 2008 and it does not distinguish the specifics behind the broad term “other” guns and therefore, any concrete conclusions about the AR-15 is, at this point, speculative. This will undoubtedly raise further debate between the two sides of the gun control issue, but intellectually fair is fair: the assertion that AR-15’s are more “dangerous” than other guns in terms of crime statistics is spurious at best, but gun-proponents also cannot argue that AR-15’s are not more dangerous. There’s simply not enough data to prove either point.

Let’s discuss the number of law enforcement officers that have been killed by weapon type:

Again, the large majority of officers that have been felled by criminals is largely the cause of hand-gun usage and even here, the nominal trend is clearly down. Despite outcries from the left suggesting otherwise, there is thankfully a bear market cycle for gun violence against peace officers.

However, a subject for debate is the “other” gun usage involved in law enforcement homicides:

Between 2005 and 2009, the ratio of “other” guns to handguns increased dramatically: generally, this has been a combination of lowering incidents of handguns and rising levels of “other” guns, suggesting that there is more prevalence of criminals using either shotguns or rifles.

This is an area where the assault-rifle debate gets tricky: we can reasonably assume that homicides against civilians will likely encompass a full range of hand and long guns, but it takes a special kind of criminal to engage law enforcement officers with so-called “other” guns. These “other” guns may very well be AR or AK variant assault rifles, and therefore, we should expect heavy support by the law enforcement community towards legislation that would severely curtail civilian access to such weaponry. After all, if the prevalence of long-gun usage is increasing against a declining hand-gun usage, peace officers are more incentivized to consider the trend, and not just the nominal reality of the moment.

So long as the gun control issue rages, investing in firearms companies is a risky proposition, especially when a popular class of firearms is in danger of facing legal expulsion. According to CNBC, AR-15’s and their associated accessories account for nearly a quarter of the 4 billion dollar gun industry (http://www.cnbc.com/id/100650400). Such a loss would be extremely difficult to overcome, given the modularity that gun owners crave regarding these so-called black rifles. Customization provides an avenue for secondary sales and many facets within the gun industry would be hurt by restrictive laws.

That, quite simply, is the fundamental reality. For the technical reality as it relates to investments, let us look at the chart for Ruger, or ticker symbol RGR:

This is a chart comparing price action in blue against momentum in gray: momentum in this case is a modified version of the “Moving Average Convergence – Divergence” (MAC-D) indicator. What we see is a tremendous lift in valuation starting from 2011. However, momentum has declined since peaking in the fall of 2011, and from there, has generally trended downwards. While the year-to-date performance of Ruger has been strong, the long-term price action does show signs of stress. I anticipate momentum to continue its slide as individual states discuss proposals on curtailing assault rifles. This could lead to price volatility in the short-term and this year will likely bring some stomach-churning moments for investors. However, a favorable ruling towards the gun industry would likely bring a scenario such as this:

In closing, the gun control issue, specifically proposals to ban assault rifles, is far too complex to summarize in a short article such as this. We do know as an absolute fact that national gun-related homicides are on the decline and that handguns statistically bear an overwhelming majority of such incidents. This is not subject for debate. What is open for undoubtedly heated discussion is the changing context within illegal gun practices: “other” gun homicides are increasing in volume and assault rifles may be more responsible for homicides against law enforcement officers. This is an increasingly difficult topic to cover considering the vitriol associated with this debate but we must understand the realities of the numbers in order to fully cement our own personal position.